Correlation Between Small Cap and The Fixed

Can any of the company-specific risk be diversified away by investing in both Small Cap and The Fixed at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Small Cap and The Fixed into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Small Cap Equity and The Fixed Income, you can compare the effects of market volatilities on Small Cap and The Fixed and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Small Cap with a short position of The Fixed. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and The Fixed.

Diversification Opportunities for Small Cap and The Fixed

0.04

Correlation Coefficient

Small Cap  The Fixed

Significant diversification

The 3 months correlation between Small and THE is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Equity and The Fixed Income in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fixed Income and Small Cap is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Small Cap Equity are associated (or correlated) with The Fixed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fixed Income has no effect on the direction of Small Cap i.e., Small Cap and The Fixed go up and down completely randomly.

Pair Corralation between Small Cap and The Fixed

Assuming the 90 days horizon Small Cap Equity is expected to generate 4.79 times more return on investment than The Fixed. However, Small Cap is 4.79 times more volatile than The Fixed Income. It trades about 0.16 of its potential returns per unit of risk. The Fixed Income is currently generating about 0.08 per unit of risk. If you would invest  1,803  in Small Cap Equity on September 3, 2024 and sell it today you would earn a total of  228.00  from holding Small Cap Equity or generate 12.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Small Cap Equity  vs.  The Fixed Income

Small Cap Equity

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Equity are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Fixed Income

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Fixed Income are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, The Fixed is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and The Fixed

The main advantage of trading using opposite Small Cap and The Fixed positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, The Fixed can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in The Fixed will offset losses from the drop in The Fixed's long position.

The idea behind Small Cap Equity and The Fixed Income pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..